Wednesday, November 30, 2011

The economic IQ of many Americans is truly appalling. To many, being a large international corporation is equated to having a license to print money, when in fact corporate profits are a relatively small percentage of gross sales, and payroll payments to employees far outstrip net profits. I highlighted this belief in a previous posting with a quote from a Occupy Wall Street protester who said he was demonstrating because he worked for American Airlines and hadn't had a raise in eight years. Well, d'oh, they couldn't afford to give raises. With its stock selling for a little over $1 a share, American Airlines has been on the bankruptcy watch for quite a while, so the actual filing was not that big of a surprise. This quote was particularly disturbing since you'd think that a longtime employee would be aware of his employer's precarious economic position.

What might be a real surprise to most people is the fact that from the beginning of the airline industry in the early 20th century to date, the cumulative historic profit of the airline industry as a whole stands at somewhere around zero. This point was humorously brought to light recently by Warren Buffett, who stated that had there been potential investors present at Kitty Hawk when the Wright Brothers made their first flight, they would have done a great favor to future investors had they shot the Wright Brothers on the spot. An equally humorous comment was made by Richard Branson, who said that the easiest way to become a millionaire was to be a billionaire, then invest in an airline.

The fact that a major industry like the airlines has never made money is truly astounding and hard to fathom. Why would anybody invest in an industry or enterprise that has never shown the ability to make a profit, particularly with a track record of many decades? Well, there are some answers to that. Airlines have had good years and indeed stretches of profitability. So once it had been shown that airlines could make money it's easy to think that they would continue to make money. Also, somebody may come up with a better idea (e.g., Southwest) and indeed make money doing it. And who could foresee the events of 9/11 which ultimately led to the bankruptcy filing of most of the major US based carriers.

However my uneducated guess is that the main reason for the lack of profits in the airline industry is the subsidization of airlines by foreign governments. Whether it's to give their airlines a "competitive" advantage, national pride over a flagship airline, viewing airline transportation as an extension of public transportation, or what, such subsidies artificially reduce fares charged by both subsidized airlines and their competitors. While US airlines have their own indirect subsidies, such as the restriction on foreign carriers to connect between domestic locations and the flight infrastructure established by major airports and the federal government, these are probably diluted by pressures to serve unprofitable domestic markets and other government restrictions.

Monday, November 21, 2011

One of the most irritating myths about the stock market is that daily news items explain most of the movements in the stock market. Every day you hear that the stock market went up or down because of a specific economic or political news event. Today, when the stock market tanked, with an almost immediate 300 point loss, it was blamed on the weekend revelation that the Supercommittee was not going to come up with any solution by its statutory deadline. However, any such connection is totally ludicrous.

As J. P Morgan once so astutely noted, stocks will fluctuate. Stocks will go up or down, even if there is absolutely no news. What controls the stock market and stock prices is the general expectation of the future health of the economy and companies by the world as a whole. This is not to say that news doesn't affect stock prices. But for news to affect stock prices, it must deviate from the current expectation. For example, if everybody expects that Microsoft will buy out Yahoo for $30 a share two months from now, Yahoo certainly will not be trading for $15 today--it'll be trading much closer to $30. Of course, expectations are not black and white, so current prices reflect the probabilities of certain events happening. So if Yahoo stock is worth $15 a share without takeover prospects, but there is a 50 percent chance that some company would buy them out in the near future for $30 a share, its current price would settle somewhere around 22½.

Which brings up to today's market drop being blamed on the Supercommittee's inability to come up with a budget alternative. Well, if the general expectation had been that the Supercommittee was going to be successful, and the failure to come up with an agreement would be catastrophic, then the cause and effect would be reasonable. But in fact the failure of the Supercommittee to find a solution was almost as surprising as the fact that the sun rose today in the eastern sky. Trading futures on Intrade a week ago pegged the chance of a Supercommitee agreement at 20 percent, a percentage which undoubtedly diminished during the week last week. Furthermore the lack of an agreement merely means that the default solution goes into effect, unless otherwise modified by 2013. Consequently, unlike something approaching a Congressional bailout vote with down to the wire uncertainty, this news had little to do with today's stock market action.

Tuesday, November 15, 2011

I think I have a relatively high interest in music. I can identify many thousands of songs in just a very few notes and have collected thousands of performance music videos from the 1950s to the present. However, there are a number of categories of music I don't particularly care for, including opera, Chinese opera, jazz, rap and classical music. Consequently when my son couldn't make the L. A. Philharmonic concert at the Disney Concert Hall and I took his tickets, that could have been quite a mismatch, as I was certainly the least sophisticated member of the audience when it came to this kind of music.

In fact I had a wonderful time with Mrs. Chandavkl at the concert. Frankly I didn't like any of the music, but I had a very interesting time observing the orchestra. For example I never realized that a symphonic orchestra was so heavily weighted towards string instruments, with just a small number of winds and percussions backing up the predominantly violin, viola and cello orchestra. The first thing that really caught my attention was the cymbal player in the back row. In the first piece performed which lasted about half an hour, he spent most of the time seated on a chair. Once in a great while he would stand up, grab his cymbals, then a minute later he would crash his cymbals once, twice or maybe even four times. I counted only four or five times when Mr. Cymbal was called on to perform, which means he probably spent 25 minutes of the 30 minutes sitting at his chair, and probably one minute actually performing. Now I know the Philharmonic musicians are world class, with intense competition to work your way into the most prestigious orchestras. But this made me wonder, exactly what made one a world class cymbal player? My guess is that there were two elements--the first being able to distinguish when your time to perform was coming up, and the second being able to operate the cymbals at the proper noise level. I do think I know what makes a world class kettle drum player. The drummer was maneuvering six different sets of drumsticks, each with a different size head, and it certainly took skill to switch from one set to another to another. Even just knowing where the various sets should sit struck me as being daunting.

The next thing I learned was that musicians in the orchestra come and go between pieces. After the first piece, Mr. Cymbal was done for the day, as were most of the other percussionists and some of the wind instrument players. Other musicians, including a new cymbal player who doubled as a bass drummer, showed up. Also, I noticed that not all the musicians turned their music pages at the same time. I guess that means there's different sheet music for different types of instruments. In addition I became cognizant of the complexity of composing and conducting a symphonic piece with all of the different instruments and the assignments. The conductor was indeed like the head coach of a sports team, not just a guy waving his baton to the rhythm.

After the first piece ended and some of the orchestra left, they brought in a piano, which was followed shortly by the entrance of the pianist who received a large ovation. The pianist was a young Asian woman in a relatively short black dress. I wondered to myself whether this might be Yuja Wang, though it wasn't until intermission that I was able to look at the program and indeed confirm that it was her. Now while I know zero about classical music, I do know enough to be aware of Yuja Wang, for the skimpy orange outfit she wore earlier this year at the Hollywood Bowl, which apparently resulted in the first ever convergence of a public performance of symphonic classical music and wolf whistles. Now besides not liking classical music, I probably dislike classical piano the most, so I really didn't appreciate her performance. But man, that lady plays a mean piano.

My last observation is how contrived the ovations for the conductor and featured performers are. After the piece has ended the conductor stands and takes his bows. Then he exits stage left. Then he comes back for another ovation. Then he exits stage left again. Then he comes back for a final ovation. In Yuja Wang's case she must have left and come back four or five times. I also noticed Yuja bows kind of funny--more like a gymnast than a musician. As we left Mrs. Chandavkl wanted to get a closer look at Yuja Wang who was going to sign autographed copies of her CD in the gift shop. However the line to see her was too long.

Sunday, November 6, 2011

Not too many sports fans outside of the mid-Atlantic area follow University of Maryland's football program, and I certainly don't. I did notice that the football team finished the 2010 season with an 8-4 record and almost won the ACC title, a tremendous turnaround from their 2009 record of 2-10. Ralph Friedgen, their coach, was rightfully named conference coach of the year. So how did Maryland reward him? Perhaps extending his contract which had only one year left to run? No, they fired him after a successful 10 year run in which he turned around the football program, though the first part of his tenure was admittedly more successful than the back half.

This would leave us to wonder as to the justification for the firing. Did the coach kick kittens, or perhaps mistreat players. No, not at all. Rather, in the thinking of the athletic director, Fridgen had raised Maryland's football program to the good level. However, the AD said good wasn't, well, good enough. Maryland football should be great. So bye bye Friedgen and hello Randy Edsall, hired away from Connecticut. This turned out to be a great hire right off the bat in the Maryland AD's search for greatness. In the first game of the 2011 season, Maryland beat the vaunted Miami Hurricanes on national television. Clearly, Maryland football was on the road to greatness.

Now after the victory over Miami I kind of lost track of Maryland's football fortunes. However, I just noticed this weekend that Maryland was whacked by traditional archrival Virginia by the score of 31-13. Since the Miami victory, this was Maryland's seventh loss in eight games, which included a loss to Boston College, previously thought to be the sorriest team in the ACC. Ralph Friedgen, where are you?

This episode is reminiscent of Nebraska's firing of their head coach a few years ago after Nebraska finished the season with a 10-3 record. The athletic director explained the firing saying that he would not be the one to oversee Nebraska football's descent into mediocrity. He was wrong as Nebraska won only 27 games in the next four years under the AD's hand picked successor, including two losing seasons. I suspect Maryland might not exceed that output.